The General Court’s Ruling on ASI’s Head Office

Last week we wondered whether the General Court of the European Union would take a broad or narrow view of Apple Inc.  In it’s state aid finding the European Commission took a narrow view.  This is from the day the finding was announced:

As a result of the tax rulings, most sales profits of Apple Sales International were allocated to its "head office" when this "head office" had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter. Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.

The "head office" did not have any employees or own premises. The only activities that can be associated with the "head offices" are limited decisions taken by its directors (many of which were at the same time working full-time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management. These activities generated profits in terms of interest that, based on the Commission’s assessment, are the only profits which can be attributed to the "head offices".

As we said last week, while the key decisions that drove ASI’s profits might not have been not documented in ASI’s board minutes they were made outside of Ireland.  And here is segment of the courts’ ruling on this central matter:

(2)    Decision-making by ASI and AOE

303    With regard to ASI and AOE’s ability to take decisions concerning their essential functions through their management bodies, the Commission itself accepted that those companies had boards of directors which held regular meetings during the relevant period, and reproduced extracts from the minutes of those meetings confirming that fact in Tables 4 and 5 of the contested decision.

304    The fact that the minutes of the board meetings do not give details of the decisions concerning the management of the Apple Group’s IP licences, of the cost-sharing agreement and of important business decisions does not mean that those decisions were not taken.

305    The summary nature of the extracts from the minutes reproduced by the Commission in Tables 4 and 5 of the contested decision is sufficient to allow the reader to understand how the company’s key decisions in each tax year, such as approval of the annual accounts, were taken and recorded in the relevant board minutes.

306    The resolutions of the boards of directors which were recorded in those minutes covered regularly (that is to say, several times a year), inter alia, the payment of dividends, the approval of directors’ reports and the appointment and resignation of directors. In addition, less frequently, those resolutions concerned the establishment of subsidiaries and powers of attorney authorising certain directors to carry out various activities such as managing bank accounts, overseeing relations with governments and public bodies, carrying out audits, taking out insurance, hiring, purchasing and selling assets, taking delivery of goods and dealing with commercial contracts. Moreover, it is apparent from those minutes that individual directors were granted very wide managerial powers.

307    In addition, with regard to the cost-sharing agreement, it is apparent from the information submitted by ASI and AOE that the various versions of that agreement in existence during the relevant period were signed by members of the respective boards of directors of those companies in Cupertino.

308    Moreover, according to the detailed information provided by ASI and AOE, it is the case for both ASI and AOE that, among ASI’s 14 directors and AOE’s 8 directors on their respective boards for each tax year during the period when the contested tax rulings were in force, there was only one director who was based in Ireland.

309    Consequently, the Commission erred when it considered that ASI and AOE, through their management bodies, in particular their boards of directors, did not have the ability to perform the essential functions of the companies in question by, where appropriate, delegating their powers to individual executives who were not members of the Irish branches’ staff.

And to repeat this is what we said on here in 2016:

Even if these companies are not deemed to be tax resident in Ireland can it be established that their profits should be taxable in Ireland?  Is the presence of a branch enough to deem the profits of the parent taxable here?

There are a couple of ways of approaching this but the key aspect is the agreements granting the rights to use Apple Inc.’s intellectual property outside the Americas to these companies.  All of the licensing and cost-sharing agreements were negotiated and signed in the US, at board meetings which took place in the US, and by directors and key decision-makers who were exclusively based in the US.  None of the key risks, functions and assets that underpin the creation and ownership of the intellectual property had a connection with Ireland.


2 replies on “The General Court’s Ruling on ASI’s Head Office”

Once again, you’ve hit the nail on the head. I expect you must be pleased that your accurate assessment of the issues has impacted on the public’s understanding – insofar as they take any interest.

However, Ms. Vestager may have lost her case (I suspect she always knew she would and was forced to use the only weapon she had available – irrespective of how ill-suited it was), but she has clearly demonstrated where the public interest of the EU lies. And Ireland is on the wrong side of it.

The public mood in many of the advanced economies is shifting and the current corporate masters of the universe are facing in to a reckoning. Ms. Vestager may be a senior officer of the Commission, but she is, at heart, a politician. She knows which way the wind is blowing and she’s doing her bit to channel it. Being seen to be kow-towing to the current corporate masters of the universe is not a good look for Ireland. And putting on the green jersey and chest-thumping about our court win will prove totally counter-productive.

It’ll take a bit of nimble footwork by those responsible in the permanent government (hopefully supported by the vanishingly few with any competence in the current transient government) to get us back onside.

Congratulations on the above and your article earlier on in the week in the Irish Times commenting on the decision in the Apple case. Some of the commentary was poor and many “experts” simply do not understand the issues and seek to peddle the notion that tax can be collected by “bell and candle” that is on a moral basis rather than on a legal one. . Your commentary stood out as sane, informed and to the point.

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